Today: Internal Analysis

Today: Internal Analysis • Administrative issues • Current Events • Chapter 4: Internal Scanning • Value Chain Analysis • RCA Records Case Analysis • Team Assignment WEBSITE: www.sba.pdx.edu/faculty/stephens/ss.html

Resources & Capabilities • Strategy From Resource-based Perspective • How do resources create competitive advantage? • Value-Chain Analysis

Opportunities& Threats Strengths &Weaknesses Strategy InternalFactors ExternalFactors Values OfStakeholders Values Of Management Strategic Analysis -Where Do We Stand? Resources& Capabilities Industry Analysis

Position Resources & Capabilities Organization The Role of Strategy In Business - The Linkage Between Strategy, Resources, & Organization

The Challenges Of Resource-Based Strategy • What Resources Do We Have? • Are They Fully Exploited? • How Else Could We Exploit Our Resources? • What Resources & Capabilities Are We Going To Need In The Future? • How Do We Build Those Resources & Capabilities?

Resource-Based View • Two Basic assumptions of RBV: • Resource heterogeneity: • Firms possess different bundles of resources • Resource immobility: • Resources are sticky- they are difficult to imitate and don’t move quickly between firms

Resource-Based View • Core competencies = company strengths that competitors cannot easily match or imitate • sources of competitive advantage. • Core competencies arise from: • Resources = financial, physical, human, technological, and organizational assets of the firm; tangible resources (land, buildings, plant and equipment); intangible resources (brand names, reputation, patents, and technological or marketing know-how) • Capabilities = company's skills at coordinating resources and putting them to productive use; reside in organizational routines (internal processes, structure, culture)

Some Terminology • Resources • Assets • Inanimate Objects • “Nouns,” “Things” • Capabilities • Skills, Aptitudes • Activities • “Verbs,” “Doing • Things”

Different Types Of Resources • Physical Assets • Plant, Equipment, & Real Estate • Financial Assets • Cash & Leverage • Human Assets • Individual Skills & Capabilities • Intangible Assets • Brand Names, Technology, Reputation • Organizational Assets • Organizational Routines & Team-Embodied Skills

Example: Walmart • Resources • superior store locations • located in rural or semi-rural areas with little or no direct competition. • strong brand reputation • customers know that prices are extremely low and quality is acceptable. • employee loyalty • lower turnover and thus lower labor costs than competitors. • Capabilities • supply chain management • ability to motivate workers with a minimum of supervision and controls

Resources • Inputs to a firm’s production process • Core Competence • A strategic capability Does the capability satisfy the criteria of sustainable competitive advantage? YES • Capability • Integration of a team of resources The source of NO • Capability • A nonstrategic team of resources Core Competencies

Core competence • What are the core competencies of these firms? • McDonald’s • Ford Motor • Intel • Coke

How Do Resources and Capabilities Lead To Competitive Advantage? (VRIO Framework) • Valuable • Does it create “value” for the customer • Rare • Do other firms have similar resources • Difficult to Imitate • Unique Historical Conditions (Southwest Airlines) • Special environmental forces • Organization • Are you organized to take advantage of your resources • Appropriable: ability of stakeholders to bargain profits away *Nonsubstitutable Capabilities that do not have strategic equivalents, such as firm-specific knowledge or trust-based relationships

Rareness Magnitude of Advantage Imitability Value Organization Profit-Earning Potential Sustainability Of Advantage Profit-Earning Potential Of Resources & Capabilities

But beware! • The harder you make it to imitate a resource, the more likely it is someone will find a substitute for it. • Dell pioneered direct mail/internet based marketing for PCs because it was locked out of the normal distribution channels. • Canon built highly reliable copiers to neutralize Xerox’s advantage of servicing capabilities

Inertia & Inflexibility -The Darkside of the Resource-based Approach • The Problem of Inertia • Isolating mechanisms are almost never permanent. Changes in technology or consumer demand can make them obsolete • Unexpected technological developments or changes in demand allow entrepreneurs to create new competencies • Overcoming These Obstacles • Experimentation & Renewal

Never take for granted that core competencies will continue to provide a source of competitive advantage All core competencies have the potential to become Core Rigidities Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats Core Competencies -- Cautions and Reminders

A core rigidities story • Through WWII, Coke was it. It had a beautiful product design—the 7oz. Bottle. • Pepsi turned this into a disadvantage—by selling 12 oz. Pepsi—for the same price as Coke. • Coke’s design cost it market share, as “cheap consumers” bought the “better value”

Vertical Chain of Production in (Branded) Soft Drink Production Corn Syrup Production (e.g.ADM) Container Production (e.g. Crown Cork & Seal) Concentrate Production (PEPSI) Bottling (independent franchise bottlers) Distribution (Independent franchise bottlers) Marketing (Pepsi) Fountain Outlets (e.g. Taco Bell) Retail (e.g. Walmart,7-11)

Firm Infrastructure Human Resource Management Technology & Product Development Purchasing & Inbound Logistics Production Distribution Marketing & Sales Service MARGIN Identifying A Firm’s Resources & Capabilities Through Value Chain Analysis • What Sequence of Activities Are Involved In Creating Value?

The Value Chain • Primary activities = involved in the physical creation of the product, its marketing and delivery to consumers, and after-sales service and support. • Support activities = provide the inputs that allow the primary activities to take place.

Using Value Chain Analysis To DetermineThe Sources of Competitive Advantage • Beyond simply using a value chain analysis to “map out” the sequence of activities, we need to do the following: • What is the cost structure of each of these activities? • How do we compare with other competitors in each of these areas? What are our strengths and weaknesses?

Value Chain Analysis • Step 1. Disaggregate the firm into separateactivities. • Step 2. Identify the resources and capabilities associated with each activity. • Step 3. Assess resources and capabilities in terms of their contributions to strategy. • Step 4. Assess linkages across activities. • Step 5. Determine what incremental or revolutionary changes are needed.

The Value Chain To gain a competitive advantage over its rivals, a company must either • perform value-creation functions at a lower cost or • perform them in a way that leads to differentiation and a premium price. Cost Advantage • Technology • Manufacturing • Organization & Culture Differentiation Advantage • Marketing, Sales & Service • Brand Name Capital • Product Development Organization

Firm Infrastructure Human Resource Management Technology & Product Development Purchasing & Inbound Logistics Production Distribution Marketing & Sales Service MARGIN Value Chain Analysis • What Sequence of Activities Are Involved In Creating Value for an organization?

Value Chain Analysis of activities • What are the primary activities? • What are the support activities? • What are company’s core competencies? • How should a company reconfigure the value chain to gain a competitive advantage? • Determine the boundaries of the firm (in-house, outsource, or partnership) • Vertical and horizontal integration • Geographical location of activities • Develop coordination where linkages are critical. Coherence.

SWOT Analysis A simple tool for positioning analysis

Internal Factors Strengths Weaknesses Let’s apply this to what we know about Southwest Airlines.

External Factors Opportunities Threats Is it okay to have weaknesses? How can a company mitigate threats?

Dangers of this tool • Static vs. Trends • Strategic fit • Distinct competence vs. competitive advantage

The Internal Environment The Strengths and Weakness of the Firm • A Firm’s Tangible & Intangible Resources combine with Firm’s Capabilities to create Distinctive Competencies • Distinctive Competencies – those activities that a firm performs better than any competing firm

The Internal Environment The Strengths and Weakness of the Firm • Sustained Competitive Advantage – firms that possess and exploit costly to imitate, rare, and valuable resources & capabilities in choosing and implementing their strategies may enjoy a period of sustained competitive advantage and above normal economic profit.

The Internal Environment The Strengths and Weakness of the Firm Tangible Resources: • manufacturing firm’s property & equipment, • R & D firm’s patents, • telephone company’s network of wire, cable, and satellites, …

The Internal Environment The Strengths and Weakness of the Firm Intangible Resources: • well-known and trusted brand names, • firm’s good reputation, • knowledgeable and creative workforce, • unifying corporate culture, • international firm’s experience with national governments, • visionary leader with strong motivation and communications skills,…

The Internal Environment The Strengths and Weakness of the Firm Capabilities • Emerge over time through complex interaction between and among tangible and intangible resources. • Become stronger and more valuable strategically through repetition and practice. • Skills and knowledge of firm’s employees, including functional expertise (human capital)

The Internal Environment The Strengths and Weakness of the Firm Capabilities Examples: • Just-in-time (JIT) delivery and well-trained inventory specialists • Database management systems and effective market research efforts

The Internal Environment The Strengths and Weakness of the Firm Value Chain Analysis • Primary Activities • Inbound Logistics • Operations • Outbound Logistics • Marketing and Sales • Customer Service • Secondary Activities • Firm Infrastructure • Human Resource Management • Technology Development • Procurement

The Internal Environment Life Expectancy of SustainedCompetitive Advantage Length of Innovation Cycle the faster the cycle, the easier it is to take away competitive advantage Example: New generation of cameras born about every 10 months Number of Dimensions of Customer Value the more dimensions, the easier it is for competitors to find ways of eroding competitive advantage Example: An I-beam is an I-beam, but an automobile comes in many shapes, sizes, etc.

The Internal Environment Life Expectancy of Sustained Competitive Advantage Switching Costs Between Rivals: the easier it is to switch, the easier it is to take away competitive advantage Example: Difficulty in switching between office systems management service providers versus ease of switching between office supplies provider.

Questions for RCA Records • How are industry changes affecting traditional record companies, new entrants, artists, and retailers? • Describe RCA’s business strategy. • Where do you envision the music industry in three to five years? • What, if anything, should RCA do differently?

Next Time: Strategic Coherence • Read Chapter 5 • Handout on Strategic Coherence • Team Time • Assign American Airlines Case WEBSITE: www.sba.pdx.edu/faculty/stephens/ss.html

Today: Internal Analysis